The Irish Fiscal Advisory Council warns in its pre-budget statement it will become politically difficult as memories of the economic crisis fade to sustain the fiscal discipline needed to reduce the national debt.
In a 20-page report in which it calls on the Coalition to maintain a “prudent” fiscal stance in the budget next month, the council questions whether the correct course now is to scale back on what was to be the final big push in the settled plan to assert control over finances.
“There is a risk that public fatigue with prolonged fiscal retrenchment could make it difficult to achieve the primary surpluses needed to reduce the debt-to-GDP [gross domestic product] ratio significantly,” says the statement .
National debt
While recognising that a €2 billion retrenchment may not now be needed to bring the budget deficit below 3 per cent next year, the fiscal council cites the need to put the national debt on a strong downward path among the reasons for its calls for a “significant” adjustment in budget 2015.
“The general government gross debt measured €215 billion or 122 per cent of GDP in [the first quarter of] 2014. The overall fiscal position therefore remains vulnerable to shocks that could lead the debt-to-GDP ratio to increase again without additional corrective measures.”
The fiscal council notes the Government plan is to achieve a gradual decline in the debt by running a primary budget surplus averaging more than 3 per cent after 2015. A primary surplus is achieved if tax income is greater than the cost of running the State, excluding interest on the national debt.
“There are political and economic explanations for why large primary surpluses are difficult to achieve and sustain. When tax revenues increase, the political system typically comes under pressure to spend the additional revenues.
“These pressures are particularly intense following a period of fiscal consolidation when various groups in society who shouldered the burden of fiscal consolidation during bad times demand a dividend when the recovery starts. Economic considerations, such as weak trading partner growth, can also mitigate against Government efforts to run large primary surpluses.”
The fiscal council says the Irish authorities will face a considerable challenge in achieving the primary surpluses required for a substantial reduction in the debt-to-GDP ratio in the coming years. “Limiting the build-up of debt by implementing significant consolidation in the forthcoming budget would also limit the size of the peak primary surplus that must be achieved.”
The council cites medium-term expenditure constraints. “The ongoing comprehensive expenditure review should be used to identify spending priorities and efficiencies so as to limit the damage to public services and protections,” it says. “However . . . care needs to be taken in pursuing policies that reduce revenue-raising capacity or introduce significant new spending commitments as part of a scaled-back adjustment package.”
Bolstered framework
The council says the strengthening of Ireland’s fiscal framework – comprising European and national elements – is an important positive legacy of the crisis.
“A well-designed fiscal framework can increase the credibility of Government commitments with regard to sound management of the public finances. If a government demonstrates strong adherence to the provisions of the fiscal framework, this provides reassurance of the political system’s intention to remain committed to a path of prudent fiscal management aimed at eliminating the government deficit and reducing the debt to a sustainable level.”
